Why The Right Should Care About Income Inequality

Why The Right Should Care About Income Inequality

Widening inequality and slowing social mobility really is a problem in America, and government policies championed by the elite have exacerbated this inequality.
Willis L. Krumholz
By

A prevailing line of thought on the right, which can be readily found in the National Review or the Wall Street Journal’s editorial page, goes like this:

Democrats’ obsession with inequality is not borne out by the data, because they aren’t accounting for the steep taxes paid by the top earners, and the generous welfare benefits paid to the bottom. The bottom fifth of Americans receives around $45,000 in annual benefits that Democrats’ measures aren’t counting.

Next, while Trump and Democrats have falsely claimed that working-class wages have been stagnant, they’ve been rising since the 1990s. Plus, because the government undervalues the usefulness of all the wonderful imports we buy off the shelves, it probably overstates inflation, which means that real wage growth since the onset of globalization in the 1970s isn’t as bad as it looks.

If we actually want to help the poor and working class, all we need is more tax cuts and deregulation. Because that’s what grows the economy!

And if the working class is suffering, in spite of our generous tax cuts, it is because they aren’t fit enough. Working-class Americans just aren’t doing the right things, or practicing self-discipline.

There’s some truth in this argument, but there’s also much that isn’t true. Overall, it misses the point.

Widening inequality and slowing social mobility really is a problem in America, and government policies championed by the elite have exacerbated this inequality. Because the solutions fit naturally with conservatism, it’s scandalous for the conservative party in America to not propose solutions—and it’s politically suicidal for Republicans to pretend like widening inequality isn’t a problem.

Yes, Working-Class Americans Are Falling Behind

First off, it is true that Democrats’ measures of income inequality don’t account for welfare. But it’s also true that people receiving welfare aren’t living high on the hog, and today’s welfare mostly comes in the form of child care, health care, housing vouchers, and food stamps, not cash.

Many people receiving these non-cash benefits don’t feel well off, or equal, compared to those earning the after-tax equivalent in cash. Many welfare recipients do feel stuck, however. Even if benefits were in cash, benefits don’t make people happy. Many would be happier working, and the Romney message is wrong.

Also, even when welfare is accounted for, income inequality has still been increasing. Since the global financial crisis, average real wages have risen, but this is almost entirely due to the top tier of earners. In general, since the de-industrialization that started in the 70s, wage gains have disproportionately gone to highly educated professionals and managers, not to working-class Americans. If you back out the managers and the professionals, real wages for the median worker have been flat for 30 years.

Some, eager to defend the status quo, have called flat real wages a myth, citing a large increase in the mid-1990s that made up for the losses seen in the ‘70s and ‘80s. Some even try to use other inflation measures that measure business costs, instead of the consumer price index (CPI), to show real wage growth.

But not using the CPI downplays the real wage stagnation, and CPI is the most accurate measure of households’ expenditures. Not only that, there are some real problems in how the CPI, the best thing we have, measures large things like housing costs, which have consistently run higher than overall inflation.

Further, after the 1990s increase in working-class real wages, they have again stagnated since the early 2000s, and only since about 2015-16 have begun to increase again. That is partly the result of Trump administration policies, and partly a result of a tighter U.S. labor market, given where we are in the economic cycle.

But just lumping all working-class wages together is far too simplified. Certain industries have driven up the median since the ‘90s, even while many other industries’ wages have lagged markedly. Wage growth in health care and education, both sectors dominated by women and government, has been particularly strong.

But working-class men’s wages in particular have been flat since the 1970s. In the last decade, they even declined. From 2007 to 2016, the real median earnings of a full-time year-round working male declined by 1.1 percent. Today, thanks to President Trump, and unreported by the media, manufacturing wages are just now starting to move higher slightly faster than overall wages in the economy.

This author is not against tax cuts. Trump’s tax reform is good because it made the corporate tax more competitive and fair, and cut taxes for pass-through U.S. business (often small businesses) as well. This attracts capital, and increases the incentive to produce things in America.

But just because we’ve seen a slight uptick in real wage growth doesn’t mean it will be maintained, as wages tend to rise toward the tail-end of the business cycle. And it isn’t just tax cuts—Trump’s trade and immigration policy certainly has something to do with the slight wage gains seen for manufacturing workers and the skilled trades. So maybe the real wage increases will be maintained, but the risk is that they are just the natural consequence of being at the tail end of the economic cycle.

By the way, flat real wages for the working class doesn’t necessarily mean firms have seen cheaper employee costs. Even as cash wages have been flat or declined in real terms, firms’ cost of benefits has risen sharply, just to keep pace with the health-care inflation that is mostly fueled by America’s government and employer-provided behemoth. And owners of American manufacturing businesses haven’t been living high on the hog, either. According to the International Monetary Fund, American manufacturing faces international competition that other U.S. industries do not, as evidenced by razor-thin profit margins for goods producers relative to other industries.

Couple the slow wage growth with families breaking apart, job losses, and the still-reverberating effects of the global financial crisis and de-industrialization, and many Americans really do feel worse off.

The Wealth Gap Is Real

But much faster than the increase in income inequality has been the increase in wealth inequality. During the global financial crisis, the working and middle-class in America were hit the hardest, because most of their wealth was in their homes.

In response to the financial crisis, central banks have pursued policies that have hugely supported the stock market. The Bank of Japan and the European Central Bank (ECB) have bought private company stocks or bonds, respectively. The U.S. Fed has pumped $4.5 trillion into the market, and counting, via purchases of U.S. Treasurys and mortgage-backed securities.

These programs aren’t really inflationary, but they do create excess credit, which has at least temporarily contributed to increases in financial asset prices. The wealthy disproportionately own these financial assets—the top ten percent own 84 percent of American stocks.

Economists and central bankers used to have the audacity to claim that the central bank support, mostly in the form of quantitative easing (QE), wasn’t really boosting the stock market above all else. Then December 2018 happened, where the market declined by 20 percent over fears the Fed would, at a snail’s pace, reduce its monetary interventions. Today, at most, the argument you’ll hear is “QE helps the rich, but it’s a necessarily evil.”

Next, the establishment crowd will say that working and middle-class Americans should and do have some of their money in the stock market, too. A rising tide lifts all boats, in other words. But historically, the working and middle class never relied on the stock market for their nest eggs, nor should they today. Stocks have declined by 50 percent twice in the last 20 years, and many middle- and working-class nest eggs were decimated. Normal Americans’ investing accounts also don’t bounce back like those of wealthy Americans after crashes.

That’s because where sophisticated firms compete to offer financial services to the wealthy, middle-class Americans still pay fees up the wazoo to access the public markets, and often underperform the overall equity market year after year on account of a large allocation to mutual funds, which on average underperform the market. Financial advisors tell them the market always eventually goes up, which is probably true unless you are Japan, Italy, or many other developed countries. But the ever-increasing charts conveniently don’t account for inflation, which means it often takes well more than ten years to get your money back after a crash, not counting fees paid to financial advisors and mutual funds.

No Country for Savers

All this is why, for this country’s entire history until several decades ago, the poor and middle class relied on a positive return to their savings, sitting in a bank, to build their wealth.

Savings accounts used to offer 3 percent, and a certificate of deposit (CD) would offer even more. As savings rates at least kept pace with inflation, once a family stored away enough savings, the things that moved them up the socio-economic ladder—the next house, or going to school—were attainable without taking on excessive debt, because these higher-order goods weren’t seeing rapid price increases year after year.

Today, however, savings accounts have consistently offered a deeply negative return once inflation is factored in. And CDs, which roughly track government Treasury bills (see chart) have also offered a consistently negative return compared to inflation ever since the early 2000s.

The other side of the coin to low returns on saving is cheap credit, which has pushed up asset prices for things like homes, and explains why the higher-order goods like college and a home have well outpaced average inflation. But the American middle class was built upon a positive return to savings and relatively low prices, compared to incomes, for houses and other family-goods.

Worse, that cheaper credit has encouraged the working class and middle class to borrow to increase, or even maintain, their standard of living. In the ‘80s, ‘90s, and 2000s, many used their homes as an ATM. The powers that be at the time, including former Fed Chairman Alan Greenspan, lauded this borrowing against home equity as a wonderful development.

That leads us to where we are today. Baby boomers are up to their ears in debt, and face a retirement crisis.

Declining Dynamism

Let’s not stop there. Today, by many other metrics, the working and middle class are being left behind, and there’s something deeply wrong with the American economy of the last 40 years.

Aside from regulatory capture, much of this is fueled by the regime of monetary stimulus that the central banks have forced upon us.

As labor’s share of gross domestic product (GDP), a measure of the economy’s output, has fallen to a historic low compared to capital’s share, cartelization in the American economy has drastically increased. As stated above, the only industry that faces a high degree of competition is manufacturing. Traditional measures of monopoly power, which chiefly look at prices charged to consumers, have been ill-enforced. Other measures of concentrated corporate power, such as monopsony power—where a firm is the primary buyer of goods or labor—show a sharp increase in large firms’ bargaining power versus suppliers, including suppliers of labor.

Much of American industry has large established moats, via regulation or otherwise. Big tech in particular has the benefit of “network effects,” where an existing platform has great value because it is already being used. Where network effects fail to stifle competition, big tech, using cheap debt, has routinely bought potential competitors for eyewatering sums, before the other firm can begin to compete. This practice has been called big tech’s “kill zone.”

Aside from regulatory capture, much of this is fueled by the regime of monetary stimulus that the central banks have forced upon us. Large firms with access to the bond market can access cheap capital. In Europe, because of the ECB’s buying of corporate debt, many firms can issue debt that pays negative interest to the investor, certainly after inflation is accounted for. In America, even indebted large firms can access relatively cheap capital via the bond market, given investors’ thirst for yield.

But if a firm is smaller, and must access capital via the banking system, credit isn’t as easy to come by, or as cheap. In other words, there’s even an inequality in who has access to capital, and at what cost, which is why periods of low real interest rates have always corresponded with an increase of cartelization and monopoly power.

This concentrated corporate power has sapped dynamism. Climbing the corporate ladder now requires advanced degrees, and costly higher education with an accompanying student debt load. Meanwhile, entrepreneurship in America is down drastically since the 1970s and ‘80s.

All this has resulted in a steep decline in social mobility, which is what Republicans should talk about to counter Democrats’ talk of inequality. Incidentally, it should be emphasized for the Republican donor class that for social mobility to function it must work both ways.

Overall, those outside of the upper echelon are having a harder time breaking in. The Cleveland Fed has found that the probability of a household outside the top 10 percent of wealth reaching that highest tier within 10 years during the period between 2003-2013 was half of what it was during 1984-1994. The fall in social mobility is even starker when examining the periods before 1984. Where America used to have much greater social mobility than Europe, some measures now say that America has fallen behind the Old Continent.

The Establishment Doesn’t Get It

If all this is true, then quite obviously tax cuts are not the only answer. Objectively, marginal income tax rates have declined substantially even as working-class wages were lagging, and while working-class families broke apart. Tax cuts didn’t cause that, but that means there must be something more than tax cuts and deregulation.

Worse, the primary beneficiaries of many of these cuts have shifted to the leftist camp, to the extent they were in the conservative camp to begin with. Corporations, especially the largest ones, are now overwhelmingly aligned with leftist causes. So are the super-rich. Even doctors are now majority-Democrat.

Republicans should focus policies on the broad masses in the working class, the middle class, the lower-upper-class, and small businesses.

That doesn’t mean we should punish these groups, as the left would do, but it does mean that Republicans should focus policies on the broad masses in the working class, the middle class, the lower-upper-class, and small businesses, who are the strongest allies to the conservative cause. Congressional budget rules aside, why on earth was Trump’s corporate tax cut permanent, while the small business cut was not?

But there’s another reason to abandon the “inequality isn’t a problem, and all we need to do is cut taxes” trope. Because the American people are much smarter than David French and the Wall Street Journal editorial board give them credit for, glossing over inequality and the struggles of the American working class, which started in the early ‘70s, is not a winning message politically. It’s not accurate, either.

Ditto for the stupid commentary that comes from the right, and even the left these days, about how the American working class deserves its plight. The plight of the American working class isn’t entirely due to “culture” and “bad choices.” Further, if the GOP keeps acting like the working class and middle class are choosing to have a hard time climbing the economic ladder, they will lose.

If they keep pretending like tax cuts for corporations and high earners, no matter how beneficial, is the magic elixir to help the working class and middle class, conservatives will lose the country. Unless conservative policymakers address the real problems facing Americans, the American people will opt for more socialism, and the country will end in oblivion.

The Solution Is Families First and Middle Class Capitalism

What should be done about all this? A few standout conservative politicians are already pursuing a different model, and going back to the roots of conservatism. This author has proposed a platform of Middle Class Capitalism, and American Families First, a collection of policy ideas that President Trump could run and focus on in his second term. All are a natural outgrowth of where Trump is already taking the Republican Party, and build upon existing Trump policies.

This includes robust antitrust and pro-competition measures, including in the health-care sector; pursuing monetary reform, to make the global monetary system work better for American workers, and to provide workers with a real return on their savings; taking on the higher-ed industrial complex, and existing student loan debt, which includes a “student loan 401(k)”; placing the family above all else, and recognizing the family as America’s primary economic engine, which includes reducing welfare’s stark penalties to marriage; a focus on the skilled trades and apprenticeships; foreign and immigration policies that value American families; and an end to trade policy that uniquely subjects American goods-producing workers to global competition, even while most other industries remain protected.

The best part of all this is that it is deeply conservative, would be popular with a wide swath of voters, and would actually make a difference. The landed interests this agenda targets are progressive bastions that have caused or contributed to the problems we face. Why not take them on?

Willis L. Krumholz is a fellow at Defense Priorities. He holds a JD and MBA degree from the University of St. Thomas, and works in the financial services industry. The views expressed are those of the author only. You can follow Willis on Twitter @WillKrumholz.
Photo U.S. Air Force photos/W. Eugene Barnett

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